It’s been a while since the last stock
market correction has occurred; the summer of 2011 to be exact. A
technical correction is defined as a price decline of at least 10% to a
security or market index following extensive price increases. Technical
market corrections are not necessarily bad as they help deter “bubble” like
valuations.
We regularly monitor economic
developments and still believe in the economic recovery and slow growth cycle.
We would advise not to be alarmed if a broad stock market correction were to
occur. Accordingly, we have placed great care in the construction of the asset
allocation to reduce the downside in portfolios if a correction were to
occur. The bond sleeve is designed to resist stock market volatility,
while the alternative strategies reduce your downside exposure by employing
various tools to hedge risks. Equities are selected based upon risk
factors that are lower as compared to their peers. It is our belief that,
through appropriate diversification, we can weather a correction while continuing
to achieve your long-term return goals.
THE GLOOM LIFTED FROM THE STOCK market last week as the Dow Jones Industrial Average rebounded above the 10,000 mark amid a rip-roaring rally. Some positive earnings news and slight improvement on the jobs front gave investors the encouragement needed to bring the sharp two-week correction to an end.
The Dow added 511.55 points, or 5.28%, to end the week at 10,198. NASDAQ rose “only” 5% to 2196, for a 104.66 point gain.
Much of the market’s enthusiasm came in the wake of positive earnings comments from the likes of State Street (STT) and Samsung Electronics [5930.Korea]. It could well mean second- quarter earnings—reporting season kicks off this week—could meet analysts’ rosy forecasts. The Street is calling for a 27% jump in quarterly profits.
Despite the stock market’s gyrations, earnings expectations haven’t changed much in recent months, according to John Butters, director of U.S. earnings research at Thomson Reuters. On April 1, analysts thought earnings would grow 22.7% in the second quarter, and those estimates rose to 27.7% near the end of May. Analysts have trimmed their numbers only slightly since then, to the aforementioned 27%.
The good times should continue to roll for the next four quarters, based on analysts’ estimates. The Street is targeting growth of 25% in the third quarter, 33% in the fourth and 13% and 20% thereafter. In all, that would mean the S&P 500 would produce $82 of earnings this year and $96 the following year. That would catapult earnings above the previous record of $88, hit three years ago.
The recent market correction implies investors have major doubts about such optimistic projections. At some point such skepticism will be warranted, but the skeptics may be too early. “The trend over the last couple of quarters has been for more companies than normal to guide [earnings estimates] higher,” says Butters.
Investor uncertainty is evident in the S&P’s multiple, which stands at 12 times expected earnings, below the 14 multiple that shares enjoyed on average in the past five years. If CEOs confirm in coming weeks that the economy and business continue to improve—even if just marginally— those expecting a double-dip recession will be proven wrong and last week’s rally won’t be the market’s last.
THE WEEKLY UNEMPLOYMENT report on Thursday came in better than expected, and also bolstered the market’s confidence. Initial claims for unemployment fell by 21,000, to a seasonally adjusted 454,000, the Labor Department reported. The four-week average remained elevated at 466,000.
The news seemed to increase the odds that the economy will slowly creep along, avoiding the ever dreaded double-dip recession.
Shares of some companies tied to the employment market enjoyed gains that outpaced the broader market. Monster Worldwide (MWW) rose 9% last week; Manpower (MAN), an employment-services company, gained 10%, and Robert Half International (RHI) added 9%.
Jobs will be the key to the stock market’s performance in the second half, says James Paulsen, chief investment strategist at Wells Capital Management. Either claims will fall to 400,000 and the market will rally, or if they stay near current levels, the S&P 500 could return to 1,000.
Paulsen’s bet is that the former scenario will play out. “We’ve had greater economic growth and created jobs faster than in the two previous recoveries,” says Paulsen. “The stuff that makes jobs is there: a profit recovery.” (Source: Barrons Online).
